Filed Under:Markets, E&S/Specialty

Slow Turn Ahead

The strong and vibrant E&S market is showing clear signs of firming

Rising prices on high-risk accounts, continuing activity by standard carriers and the development of more innovative products signal a gradual hardening trend in an E&S market that continues to be strong and vibrant.

These trends make E&S a great engine for independent agents looking to grow territory or increase specialty markets.

"From a broad perspective, I would characterize the E&S market as a transitional one, with a lot of businesses under duress," said Derek Broaddus, senior vice president for excess casualty at Allied World. "Loss-sensitive accounts are seeing upward pressure on price." On the other hand, Broaddus is still seeing soft market behavior. "For the most part, I could consider the market to be transitional and leaning toward increasing rates and restricted terms."

The trend in the E&S market has been consistent for about the last 12 months as far as pricing and capacity are concerned, said Chris Reisdorf, vice president of marketing for TAPCO Underwriters. "We have been struck by the poor economic conditions relative to demand and decreasing payrolls, receipts and salaries," he said. "From agents, we are hearing that there is a slightly increased demand for renewals. However, the market is still ‘squishy.’ Still, we are able to negotiate rates in competitive situations."

Related: Read the article "Hartwig: U.S. Insurers Should Look at 'New Trajectory of Growth'" by Chad Hemenway.

"We are not seeing a hard market or a soft market, but one that is firming," said Bob Rheel, executive vice president, customer, distribution and marketing, for Aspen Insurance. "We are seeing rates firming, rate increases on our books, and our competitors asking for rate increases." In addition, he added, underwriters are underwriting again, and the terms and conditions of the policies are also firming.

But although the market is in transition, market trends will make hardening inevitable. "There have been some consolidations on the retail side and wholesale side," Rheel said. "We expect these consolidations to continue throughout this year and into next year." As the market firms, Rheel sees this firming turning into a hard market within about 3 years.

"In general, the E&S market is extremely strong and vibrant," said Bob Sargent, president and CEO of Tennant Risk Services and president of NAPSLO (National Assn. of Professional Surplus Lines Organizations). "Things are going reasonably well in a competitive environment."

From the market standpoint, there remains a fair amount of competition, Sargent said. The two important trends he sees are specialization and innovation. Specialization within the special market business is growing, because the underwriters and brokers realize that they need expertise to serve their clients. "In addition, the E&S market has been leading the business in innovation, such as in the areas of cyber-risks and technology covers," Sargent continued. "Some of the markets believe that there will be new business as the economy starts to turn around."

Linc Trimble, head of U.S. casualty for Torus Insurance, said his perspective on trends may be somewhat narrow due to his focus on excess liability in the E&S space. However, the firming trend in the E&S market represents both good news and bad news, he said.

For the umbrella excess E&S space, the worst is over in terms of rate deterioration, he said. Citing a recent MarketScout report on umbrella excess, the line is "flat for the first time since 2005. This is good news." His observations of the market also support this notion. "Of course, this doesn’t mean that we are in a hard market," he said. "However, we are heartened by the fact that it is clearly not getting worse, and there is hope that rates are turning around." Torus is asking for and getting rate increases, he said. "It’s not large percentages, but we are able to capture additional rates compared to exposure base," Trimble said.

Standard Market Competition

Are standard market insurers continuing their migration to the E&S market? According to most experts, the trend is slowing, with few new players these days. However, players don’t seem to have any plans to leave any time soon, and some may be expanding their presence in the field.

"We saw some standard companies starting E&S units 6 to 12 months back, but not in the last 6 months," Rheel said.

Overall, according to Sargent, the long-term profitability of the E&S market has proven itself and is a great way for a company to diversify. "As a result, I think there is a long-term trend for many standard companies to have specialty surplus line divisions," he said.

Related: Read the article by Mark E. Ruquet "Willis CEO: Managing Risk Requires Vision for the Long Term."

"My opinion is that they are still very much in the E&S space," Trimble said. In Torus’s monthly reviews of lost or unwritten business, the most prevalent reason is that a standard market carrier has either kept or acquired the umbrella coverage, he said. "So when I think of whom my major competition is, I don’t think in terms of other E&S markets… I think in terms of the standard market." He added that standard market insurers may retract as the market begins to get harder. However, he is not seeing any evidence of that yet.

As Reisdorf sees it, things have stabilized in this area. "There have been some standard market insurers that have created their own internal E&S outlets; however, I don’t consider these to be our competitors at this point, and they haven’t really impacted our ability to write business."

Broaddus is seeing behavior he hasn’t seen in a long time, which is indicative of hardening market tendencies. "This involves standard markets doing last-minute bailouts on deals that would be considered more E&S business," he said. "This is a tell-tale sign of an emerging market."

Strategies for Agents

The transitional state of the current E&S market can make it tough for agents and brokers to deal with, Broaddus said. "There are spots that are seeing upward price pressure and there are spots that are not. For brokers that deal with a lot of types of business, it will be a mixed bag for them and difficult to predict what their customers are going to do on their insurance renewals."

Agents are working just as hard these days as they did in years past but making less money, because exposures and premiums are lower and rates are still relatively soft, Reisdorf said. "As a result, agents need to find ways to increase revenue," he said. "I think it is a good time for them to use E&S to their advantage, especially as it relates to growing territorially or adding specialty markets."

Several experts say it’s a good time for agents to establish relationships with wholesalers and offer some strategies to select the best relationships.

"I’ll start out by stating the obvious which is, of course, to work through your ‘neighborhood wholesaler,’" Trimble said. "Wholesalers are a great resource for umbrella excess. For one reason, they give retailers access to additional markets and capacity. They also offer a more diverse appetite for risk than retailers will find in the standard marketplace."

Related: Read the article "2011 Cats Drive Underwriting Losses; 2012 Begins With Rate Increases" by Phil Gusman.

Wholesalers are eager to help out on umbrella, which is usually the last piece of business that is placed in the program, Trimble aid. In other words, a retailer may have put in a lot of work into creating a primary program, and just needs a quick solution for the capacity on top. "Wholesalers are a great resource for this," he said.

Allied World offers direct and wholesale brokerage relationships with the agency community, Broaddus said. "If you have an existing relationship direct with us, that’s fine," he said. "However, if you don’t have a relationship with us or any other E&S market, then a strong wholesaler would typically already have an existing robust relationship."

What should agents look for in wholesalers? The experts offer four recommendations: financial stability, commitment to the market, ability to provide value-add, and being a member of NAPSLO.

  1. Financial stability. "One piece of advice I could offer to retailers for accessing the E&S marketplace for umbrella excess is to realize that price is important," Trimble said. "However, the financial quality of the carrier is also extremely important, mostly because umbrella excess is long- tail business…they want to select a carrier that has the financial stability to be there to satisfy those claims as they unfold."
  2. Market commitment. It is important for the carrier to have a long-term commitment to that line of business, so as the market changes, the retailer will have a carrier that is able to evolve with the changes in the marketplace, Trimble said.
  3. Value-added expertise. As the market firms over the next 3 years, agents and brokers will have to explain to customers why there are significant rate increases. "As such, agents and brokers need to be able to have ‘value-add’ conversations with their customers," Rheel said. "My suggestion is to create strategic relationships with key wholesalers who are working to position themselves to add value to the retail side, either through industry expertise or product expertise."
  4. NAPSLO membership. Agents should select a wholesaler who is a member of NAPSLO. "Members can provide specialty line expertise, as well as excess and surplus lines expertise, including both product line market and class expertise," Sargent said. They also provide access to markets that will write this kind of business. "For example, our operation specializes in professional liability, so we have the expertise and capabilities to serve this market."

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